Home building off by nearly half

The market for homes has slowed nationally, and Twin Cities-area homebuilding has decreased accordingly.



Jim Buchta, Star Tribune

Published October 4, 2006 in the Star Tribune

Dogged by slowing home sales, residential construction activity in the Twin Cities metropolitan area continues to plummet, according to data released Wednesday by the Builders Association of the Twin Cities.

In September, Twin Cities-area home builders were issued 417 permits to build 759 units. That's a 49 percent decrease in permits and a 48 percent decrease in units compared with the same time last year. So far this year, the number of new units built in the metro area is down 23 percent compared with the 2005 period.

The local slowdown is part of what Federal Reserve Chairman Ben Bernanke on Wednesday called a "substantial correction" in the national housing market.

Bernanke said the cooling housing market would be a factor in the overall slowing of the U.S. economy. The weaker housing market may trim as much as 1 percentage point off overall gross domestic product growth in the last half of 2006, he said.

And last week, David Seiders, chief economist for the National Association of Home Builders, said he expects housing starts to fall 11.5 percent this year compared with 2005 and another 11.7 percent in 2007.

But because mortgage rates still are historically low and the national economy remains relatively healthy, he doesn't expect the downturn to contribute to "economic calamity."We need a period of below-trend performance to work off excess inventory and improve housing affordability," he said. "Mortgage rates are dropping; builders and sellers are offering all sorts of incentives and upgrades; energy costs are retreating, and the national economy is moving ahead, making it a very good time to buy a home."

Twin Cities-area home builders say several reasons are behind slower permit activity, including a reduction in the number of houses being built without buyers and general concerns about the market.

"There's no one silver bullet," said Curt Swanson, president of the Twin Cities association. He added that a slowdown was inevitable after record activity in recent years.

So far this year, builders have been issued 5,909 permits to build 10,168 units. That's a 27.5 percent decline in the number of units compared with the 2004 market peak.

A slowdown in the market for existing homes is complicating matters; many would-be new home buyers proceed with caution, fearing that their current homes won't sell or that they won't be able to get their asking prices.

"We got a little ahead of ourselves because the market was so good for so long, but we're cooling off a bit," Swanson said. "But on the other hand, people I've talked with think that if the slowdown continues much longer, we could see some pent-up demand."

Earlier this year, rising mortgage interest rates and record-high oil prices put a damper on the market, making people fearful of a significant economic slowdown. Since then, however, rates have fallen slightly and oil prices have eased.

Michael Noonan, Minnesota division president for Toll Brothers, said that he expects consumer confidence to rise in the coming months as buyers and builders adjust to the realities of this new market. In the meantime, he said, builders who have been operating under the "build it and they will come" premise have unsold inventory they're now trying to move by offering deals and incentives.

"We could never possibly have dreamed that the market could continue to fire on all cylinders like it was," Noonan said. "It had to catch its breath, and we're seeing that now."

Jim Buchta is at jbuchta@startribune.com.
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